NBFC Registration - An Introduction

Non-banking financial companies’ aka NBFCs are the financial institution that deals in financial services. NBFC institutions offer several financial services without having any banking license. They are allowed to involve in financial activities under section 45-IA of the RBI Act.

NBFCs are managed by different financial bodies of India such as RBI, IRDA, SEBI, National Housing Bank, and Department of Company Affairs. NBFCs deal in various aspects of financing, and they are regulated different financial bodies as per their nature of the activity.

Not every NBFC is required to register under RBI, but they are sure to register with the respective regulators they are regulated by. For example, Nidhi, Chit, National Housing Bank, Insurance companies are also NBFC, but they are regulated under different laws.

For NBFC registration, there is a requirement of minimum capital of Rs. 2 cr; therefore, an applicant needs to register a company with the prescribed capital along with the requisite government fees.

NBFCs offer various banking and non-banking services to the people in need. They do not own a banking license for the services they render but follow the rules and regulations adhere by RBI. Reserve Bank of India regulates and supervises the functions of NBFCs according to the provisions mentioned in Chapter III B of the RBI Act 1934. Only a registered NBFC can commence its operation in the market.

NBFCs can accept or renew deposit for a minimum period of 12 months. However, an NBFC cannot accept demand deposit and is not liable to issue cheques.

RBI has the authority to cancel the certificate of registration, in case, if any company is not happy with the RBI order then it has the right to file an appeal against the order within the period of thirty (30) days from the date of the order of cancellation of the certificate of registration communicated to the company.

The list of registered NBFC is available on the official website of RBI. One can check the NBFC registration number by visiting www.rbi.org.in.

Reserve Bank of India has defined the term Net Owned Funds (NOF) under section 45-IA of the Reserve Bank of India Act, 1934. As per the act, it means:

The accumulation of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company post deducting the following items from it:

• Accumulated balance of loss

• Deferred revenue expenditure

• Other intangible assets

The final amount is further reduced by the following:

Investment of such companies in the shares of its subsidiaries, same group companies, and other Non-Banking Financial Companies; andthe book of value of debentures, bonds, outstanding loans and advances (including hire purchase and lease finance) made to, and deposits with its subsidiaries and companies within the same group exceeding 10% of the amount calculated in (1) above.

As per the guideline provided by the RBI, Net Owned Funds at the time of takeover should not be less than INR 2 crores

NBFCs raise funds by borrowing money from banks, or they sell commercial papers to mutual funds to raise money. They provide this money to small and medium business enterprises, retail customers, and so on.

Any business that fulfils the following criteria is eligible to apply for NBFC license:

Is registered under the Companies Act 2013 and has the minimum capital of INR 2 crores

It is not mandatory to get NBFC software; you can get it once you are licensed.

An NBFC company cannot take a loan to meet Rs 2 crore requirements.

Yes, you can use an initial fixed deposit but for a specified period of time.

Well, it is necessary to have a certain amount of experience to get this license.

Yes, it is necessary to hire an NBFC consultant.

It should not be less than INR 2 crores though limit can exceed.

NBFCs stand for Non-banking Financial Institutions. NBFCs are those entities or financial institutions which offer certain bank-like and financial services, although they do not hold a banking license. Some examples of NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders.

A company registered by the Companies Act, 2013 and desirous of initiating business of non-banking financial institution as defined under Section 45 I(A) of the RBI Act, 1934 must comply with the below things:

i) It must be a company registered under Section 3 of the Companies Act, 2013.

ii) It must have a minimum amount of net owned fund of ₹ 200 lakh (The minimum net owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately by RBI on specialized NBFCs).

Unlike banks, NBFCs are not allowed to accept such deposits which are repayable on demand. Banks form an integral part of payment and settlement cycle while NBFC, is not a part of the system.

Some necessary documents include Certificate of Incorporation, updated KYC of the Shareholders and Directors, Net-Worth Certificate of directors, shareholders, and the company, education and qualification proof of the directors, company’s PAN & GST number, documents in support of the address of the company, details of the bank account of the company, the board’s resolution approving the formation of NBFC, etc.

Although Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Nidhi Companies, Insurance companies, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, and Chit Fund Companies are NBFCs, however, they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions. These are regulated by different authorities under different prescribed rules.

The RBI has been accorded the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs which comply with the defined 50-50 criteria of principal business. The Reserve Bank can also penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI.

If companies that are needed to be registered with the RBI as NBFCs; are found to be conducting non-banking financial activity, such as lending, investment or deposit acceptance as their principal business activities, without seeking registration, the Reserve Bank has the power to levy penalty or fine on them or can even prosecute such companies in a court of law.

The regulations applicable to the ND-NBFC with asset size of less than ₹ 500 crore are as follows:

(i) They would not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed public funds and do not have a customer interface.

(ii) Those having a customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing any public funds.

(iii) Those accepting public funds would be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.

(iv) If both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.

The meaning of public funds is different from that of public deposits.

Public funds comprise public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds procured by issuing Commercial Papers, debentures, etc. However, although public funds include public deposits in the general scenario, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.

There are various NBFC compliances which needed to be followed such as Unaudited March Monthly return/NBS7, Audited March Monthly return/NBS7, Statutory Auditors certificate on Income & Assets, Information about Cos having FDI/Foreign Funds, Resolution of Non-acceptance of Public Deposit, File Audited Annual Balance Sheet and P&L Account, Declaration of Auditors to Act as Auditors of the Company, etc.

RNBC stands for Residuary Non-Banking Company. It is a class of NBFC which is a company and has as its principal business of receiving of deposits, under any arrangement or scheme whatsoever or in any other manner; and not being Investment, Asset Financing, or Loan Company. Moreover, such companies are needed to maintain investments as per directions of RBI, in addition to liquid assets.

The maximum rate of interest that an NBFC can pay to a depositor must not be more than 12.5%. The RBI keeps on altering the interest rates depending upon the macro-economic environment.

The NBFCs are equipped with an option to accept/renew public deposits for a minimum period of 12 months and a maximum period of 60 months. Moreover, they cannot accept deposits on demand.

A significant impact can be seen in the financial markets & BFSI sector due to COVID-19. Credit risk is the major problem which has been arisen due to considerable deterioration in the market, and such disruptions gave rise to liquidity issues. However, in our opinion NBFCs having a business continuity and contingency plan will effectively overcome the impact of this disruption after slow down of outbreak. The Indian government will surely take necessary measures and bring policy measures to strengthen NBFCs post pandemic. For now, it is important to give assurance to the consumers, and industry with capital and reduced interest rates.

Drafting a business plan for NBFC registration is a mandatory requirement to secure profits, to attract investors as well as to secure a loan for working capital. However, without drafting a proper business plan, the organisation would be aimless as no defined objective will be there to achieve.

There are multiple types of NBFC in India, which are as follows:

• NBFC – ICC [Investment & Credit Company]

• Infrastructure Finance Company (IFC)

• NBFC-MFI [Micro Finance Institution]

• NBFC - CIC-ND-SI [Systemically Important Core Investment Company]

• NBFC-IDF [Infrastructure Debt Fund]

• NBFC-Factors

• Mortgage Guarantee Companies

• NBFC-NOFHC [Non-Operative Financial Holding Company]

NBFCs perform multiple functions; some of them are as follows:

• Hire Purchase & Leasing

• Retail Financing

• Rural Financing

• Venture Capital Services

• MSME Financing

• Trade Financing